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Now that Ross Garnaut has released his report and a carbon trading scheme in Australia is becoming a reality, many are asking whether it is really going to be worth it. Will it cost the economy too much?  Are householders really willing to pay to reduce the extent of global warming? 

Despite the clamour in the media, economic modelling suggests the impact on households is, in fact, very modest. Achieving substantial reductions in greenhouse gas emissions does not stop economic growth. Typical modelling results suggest that deep cuts in emissions would results in annual economic growth rates of 2.2 per cent per annum, rather than 2.3 per cent. The cumulative impact would be that national income will be around 45 per cent higher in 2020 than in 2005 which is only around 1 per cent lower than it would be without policy action.

This means that household incomes will continue to increase, just a little more slowly. To illustrate, suppose that we did nothing about global warming. In this case modelling results suggest that average household income will increase from $47,600 today to $64,200 in 2020. A 1 per cent reduction in future income means that instead of increasing to $64,200 by 2020, household income increases only to $63,558. 

In other words, the economic impact of Ross Garnaut’s recommended response to global warming is relatively small, and household income will continue to increase.

But is this perspective understood by Australian households and the politicians who represent them?

In our work on the impacts of climate policy we have found that many people think reducing emissions will result in incomes falling from current levels. A recent survey by Roy Morgan Research of over 600 households asked what they thought the economic impacts of Australia reducing its greenhouse gas emissions would be. Only 43 per cent of respondents thought there would be no noticeable effect on future living standards, or that the reduction in future household income would be less than 5 per cent. The remainder thought – incorrectly – that living standards would be lower than current levels, or that future household income would decline by more than 5 per cent, or were not sure.

Arguably, this misunderstanding reflects the fact that most economic commentary by the media or politicians focuses on the ‘cost’ of taking action. For many people, this implies that household income will decrease from current levels, and by a substantial amount. There is also a tendency to focus on those industries likely to be most affected by a carbon trading scheme, and not on those new industries likely to benefit.

This misinformation appears to be having profound effects on public support for greenhouse policy.

To better understand the consequences of this communication bias, we conducted a survey of about 3000 Australian households. In the survey respondents were asked whether they would vote in favour of Australia making ‘significant efforts’ to reduce emissions. Before voting, one group of respondents were given accurate information about the economic impacts of responding to global warming: that is future income would grow more slowly than it would without policy action, but would still be considerably higher than current income. For this group, some 85 per cent of respondents voted in favour of reducing emissions. Other respondents were told that responding to global warming would cause household income to decline from current levels. Once current income declined by more than 17 per cent, less than 50 per cent of respondents voted in favour of reducing emissions.

These results show that if people believe that emissions reductions will cause household income to fall, and that the impact would be large, a referendum on emissions reductions would fail.

As part of this research we also examined the effect of improving respondents’ knowledge about global warming. One sub-sample of respondents was given balanced scientific information about the causes and consequences of global warming. This lead to these respondents being willing to pay larger amounts to reduce the impact of global warming, implying that improved understanding leads to higher levels of support.

However, the negative effect on support from mis-communication about economic impacts was much larger than the positive effect from improving respondents’ knowledge.

The implication is that while it is important to better inform the community about the causes and impacts of climate change, it is more important to clearly communicate the economic consequences of greenhouse policy. Emphasising that reducing emissions will only lead to a modest slowing in economic growth will increase public support. This is likely to lead to more focused action from politicians and possibly more substantive reductions in emissions than those currently planned.

Mark Morrison is Professor of Economics, and Director of Economics and Regional Development in the Institute for Land, Water and Society at Charles Sturt University.